It looks like someone linked you here to our printer friendly page.
Please make sure you go Back to Safehaven.com
for more great articles just like this one!

Copper Bubble is Being Punctured

By: Trading On The Mark | Monday, March 17, 2014

For several reasons, China is an enormously important part of the global market
for copper (NYSEARCA:CUPM), and now it is dragging the price of copper down
because of changes in both demand and supply.

On the demand side, copper is integral to the construction of new buildings,
electrical systems, machinery, and electronics. However, the gradual
and choppy slow-down in China's industrial output over the past three
years has correlated (roughly) with a decline in copper prices. More recent
data have shown a sharp drop in China's industrial output and exports during
the first months of 2014, and that recent change coincided with a rapid decline
in copper prices.

Also on the demand side, copper inventories in China had increasingly been
used in recent years in a variety of financing mechanisms that provided businesses
with loans they would otherwise be unable to acquire, and that provided investors
with higher return than they could find with traditional bonds. This non-traditional
financing has taken many different forms, but one
of the simplest examples is described below.

Chinese banks are limited in their lending by the amount of deposits they
hold. However, they have been able to circumvent that restriction and play
a role in lending by facilitating non-traditional loans. For example, a Chinese
trader could purchase some refined copper on the global market and import it.
The copper would sit in a dockside warehouse, not yet subject to import taxes,
and the trader would go on to use the copper as collateral for a letter of
credit or a short-term loan from a Chinese bank. The trader would then invest
the funds for a brief time in a high-yield managed investment vehicle and would
retrieve the funds in time to pay back the bank. Since the bank credit was
always covered by collateral, it was not subject to the same regulation that
would have applied with a traditional loan that showed up on the bank's
balance sheet.

Now there are signs that the demand for copper as collateral may be decreasing
for several reasons:

First, China's economic slowdown may be depressing demand by businesses
for loans - especially the types of higher-interest loans that businesses
had previously been obtaining from non-traditional sources, and that sometimes
used copper as collateral.

Second, the China Banking Regulatory Commission told
banks in February that they must reduce their off-balance-sheet lending
to a wide set of quasi-public local government financing platforms (LGFPs).
Again, some of these finance arrangements have involved copper stockpiles.

Third, businesses are increasingly
able to obtain financing directly from investor pools and wealth
management products (WMPs) that are not tied to bank loans. This type
of funding does not require the type of concentrated collateral that
we saw in our copper-trading scenario described above.

Along with a double hit on the demand side, copper prices also are presumably
seeing pressure from an increase in supply as some of the collateral-backed
lending arrangements unwind. More and more of the copper that is still stockpiled
in warehouses is now unencumbered and is again available to the market.

More than a year ago, we presented the technical
analytic case for a significant decline in the price of copper, and so
far that forecast has matched the reality. Price consolidated in a multi-year
triangle before breaking downward early in 2013. After having spent the rest
of 2013 hovering at a lower plateau of consolidation, price is again breaking
downward to seek the next support area, which we believe is between the 2013
low of 2.97 and the Fibonacci-related price support at 2.94. That area might
produce a stall, but we do not expect it to hold. Our longer-term forecast
is for price to reach closer to the 2.0 area, with 1.80 being a possible
Fibonacci-related target in the big picture.

If prices are to tumble from around the support area mentioned above, then
the weekly chart shows an updated view of where they might find their next
stepping-stone supports. A likely target area for a strong downward wave [iii]
would be between 2.62 and 2.75, although it is not inconceivable that a third
wave could extend as far as 2.09.

Copper prices are considered a bellwether of changes in economic growth and
of large-scale movements in stock indices. Readers can find additional articles
about the waning bull market for equity at our website.

Staying on the right side of the market and making profits consistently is
challenging, but it's what we help our members do every day on time frames
ranging from intraday to swing trading. Beyond the public blog, members have
access to extensive sets of charts and technical analysis for major traded
commodities, as well as a live intraday trading forum where we chat with members
and identify trading opportunities as they arise.

Our work is grounded in several technical methods. We make use of Elliott
Wave, Gann techniques, Fibonacci relationships in price and time, cycles,
and other approaches. Most members have several years or decades of trading
experience, but we also provide an environment where the dedicated newer trader
can learn much that is not available in published books or found in courses.